Zix Reports Second Quarter 2018 Financial Results

Record Quarter Signals Strong Business Fundamentals and Expanding
Growth

July 31, 2018 04:15 PM Eastern Daylight Time

DALLAS--(BUSINESS WIRE)--Zix
Corporation (Zix) (NASDAQ: ZIXI), a leader in email security,
today announced financial results for the second quarter ended June 30,
2018.

Second Quarter 2018 Financial Highlights (results compared to the
same year-ago quarter)

Revenue increased 7% to a record $17.5 million

Annual contract value (ACV) increased 13% to a record $74.0 million

New first year orders increased 27% to a record $3.3 million

Total orders increased 39% to a record $21.9 million

GAAP net income increased 62% to $1.8 million

GAAP fully diluted earnings per share increased 65% to $0.03

Cash flow from operations increased 7% to $3.4 million

Non-GAAP fully diluted earnings per share increased 14% to $0.07

Adjusted EBITDA increased 3% to $4.3 million

The company ended the quarter with $17.7 million in cash and no debt

Management Commentary

“With new records established virtually across the board, Q2 2018
represented a standout quarter for the company,” said David
Wagner, Zix’s Chief Executive Officer. “Nearly all of our key
metrics, including revenue, ACV, new first year orders and total orders
reached all-time highs, driven by the strong performance of our
enterprise and corporate & middle-market sales teams. Our strategy of
expanding our cloud-based offerings continues to gain traction,
particularly with ZixProtect and ZixArchive. Collectively, our advanced
threat protection and unified archiving solutions made up 25% of our
total new first year orders during the quarter, an increase of 65% from
Q1 2018. Our gold standard email encryption product also saw solid
year-over-year growth in new first year orders, increasing 10%, driven
by a 77% increase in the number of hosted customers compared to Q2 2017.”

Zix’s Chief Financial Officer Dave
Rockvam added: “The continued growth of our hosted email encryption
offering, the success of our email protection bundles and disciplined
cost management enabled us to yet again achieve both our top and bottom
line guidance for the quarter. Revenue of $17.5 million represented 7%
year-over-year growth and a new record for the company, as we continued
to meet the increasing email protection needs of our customers. This is
perhaps best reflected by our record new first year orders of $3.3
million, which were up 27% year-over-year, driven by strong attach rates
into our installed base which delivered 56% of our new first year orders
for the quarter. Our backlog is also climbing, helped by the record
total orders of $21.9 million we generated during the quarter, which was
up 39% over the same year ago period. We also continued to execute on
our balanced capital allocation strategy with the acquisition of Erado,
working on our M&A pipeline and repurchasing more than $2.3 million of
our common stock. Because of our strong results year-to-date and
visibility into our business for the rest of the year, we are raising
the midpoint of our revenue and GAAP earnings per share guidance, as
well as our non-GAAP adjusted earnings per share guidance, for 2018.”

Wagner continued: “Our investments to build out our multi-tenant
environments are going according to plan, and we’re making solid
progress integrating unified archiving into ZixCentral. Unified
archiving enables us to address protection of virtually all digital
communication channels, which will further differentiate our full suite
of services, increase our attach rates and enable higher customer
retention. We’re executing on our strategy and gaining momentum, as we
continue to assemble the right product offer, expand our sales
leadership and focus our marketing presence in email protection.
Overall, the record new order performance in Q2 represents a meaningful
milestone in our journey and demonstrates that we’re executing on the
right strategy.”

Strengthened
the Zix managed service provider program by expanding offerings to
include email threat protection and email archiving and providing
additional partner value with flexible billing, rapid deployment and a
centralized management console for administration of Zix solutions

Repurchased 500,000 shares of its common stock at an average purchase
price of $4.61 per share

Second Quarter 2018 Corporate Financial Summary and Other Operational
Metrics

Service contract commitments that represent future revenue to be
recognized as the services are provided

Financial Outlook

For third quarter 2018, the company forecasts revenue to range between
$17.7 million and $17.8 million. The company forecasts fully diluted
GAAP earnings per share to be in a range of $0.03 and $0.04 and fully
diluted non-GAAP adjusted earnings per share to be $0.08 for the third
quarter 2018.

For fiscal year 2018, the company is increasing the midpoint of its
revenue guidance range to between $69.5 million to $70.5 million,
representing an increase of 6% to 7% compared to fiscal year 2017. The
company forecasts fully diluted GAAP earnings per share to be between
$0.15 and $0.17 and increases its fully diluted non-GAAP adjusted
earnings per share guidance to $0.31 for fiscal year 2018.

A live webcast of the conference call will be available in the investor
relations section of Zix’s website here.
Alternatively, participants can access the conference call by dialing
1-855-853-6940 (U.S. toll-free) or 1-720-634-2906 (international) at
least 15 minutes before the call and entering access code 7272336. If
you have any difficulty connecting with the conference call, please
contact Liolios Group at 1-949-574-3860.

An audio replay of the conference will be available for seven days, by
dialing 1-855-859-2056 (U.S. toll-free) or 1-404-537-3406
(international) and entering the access code 7272336. An archive of the
webcast will also be available on the Zix investor relations website.

About Zix Corporation

Zix Corporation (Zix) is a leader in email security. Trusted by the
nation’s most influential institutions in healthcare, finance and
government, Zix delivers a superior experience and easy-to-use solutions
for email encryption and data loss prevention, advanced threat
protection, unified archiving and bring your own device (BYOD) mobile
security. Focusing on the protection of business communication, Zix
enables its customers to better secure data and meet compliance needs.
Zix is publicly traded on the Nasdaq Global Market under the symbol
ZIXI. For more information, visit zixcorp.com.

Statements in this release that are not purely historical facts or that
necessarily depend upon future events, including statements about
forecasts of sales, revenue or earnings, potential benefits of strategic
relationships, or other statements about anticipations, beliefs,
expectations, hopes, intentions or strategies for the future, may be
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Readers are cautioned not
to place undue reliance on forward-looking statements. All
forward-looking statements are based upon information available to Zix
on the date this release was issued. Zix undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. Any
forward-looking statements involve risks and uncertainties that could
cause actual events or results to differ materially from the events or
results described in the forward-looking statements, including but not
limited to risks or uncertainties related to market acceptance of both
existing and new Zix solutions, changing market dynamics resulting from
technological change and innovation, and how privacy and data security
laws may affect demand for Zix data protection solutions. Zix may not
succeed in addressing these and other risks. Further information
regarding factors that could affect Zix financial and other results can
be found in the risk factors section of Zix’s most recent annual report
on Form 10-K filed with the Securities and Exchange Commission.

ZIX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30,

2018

December 31,

(unaudited)

2017

ASSETS

Current assets:

Cash and cash equivalents

$

17,696,000

$

33,009,000

Receivables, net

2,296,000

1,389,000

Prepaid and other current assets

2,978,000

3,222,000

Total current assets

22,970,000

37,620,000

Property and equipment, net

4,212,000

4,048,000

Other assets and deferred costs

7,920,000

-

Intangible Assets, Net

14,467,000

5,524,000

Goodwill

13,494,000

8,469,000

Deferred tax assets

22,340,000

25,647,000

Total assets

$

85,403,000

$

81,308,000

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued expenses

$

8,943,000

$

7,154,000

Deferred revenue

24,082,000

28,362,000

Total current liabilities

33,025,000

35,516,000

Long-term liabilities:

Deferred revenue

3,966,000

1,087,000

Deferred rent

1,095,000

1,185,000

Total long-term liabilities

5,061,000

2,272,000

Total liabilities

38,086,000

37,788,000

Total stockholders’ equity

47,317,000

43,520,000

Total liabilities and stockholders’ equity

$

85,403,000

$

81,308,000

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017

Revenue

$

17,500,000

$

16,378,000

$

34,153,000

$

32,271,000

Cost of revenue

3,806,000

3,247,000

7,319,000

6,070,000

Gross profit

13,694,000

13,131,000

26,834,000

26,201,000

Operating expenses:

Research and development

2,978,000

2,708,000

5,956,000

5,131,000

Selling, general and administrative

8,562,000

7,783,000

16,115,000

15,768,000

Total operating expenses

11,540,000

10,491,000

22,071,000

20,899,000

Operating income

2,154,000

2,640,000

4,763,000

5,302,000

Operating margin

12

%

16

%

14

%

16

%

Other income, net

360,000

66,000

479,000

145,000

Income before income taxes

2,514,000

2,706,000

5,242,000

5,447,000

Income tax expense

(674,000

)

(1,567,000

)

(1,510,000

)

(2,533,000

)

Net income

$

1,840,000

$

1,139,000

$

3,732,000

$

2,914,000

Basic income per common share:

$

0.04

$

0.02

$

0.07

$

0.05

Diluted income per common share:

$

0.03

$

0.02

$

0.07

$

0.05

Shares used in per share calculation - basic

52,467,904

53,573,431

52,670,540

53,268,005

Shares used in per share calculation - diluted

53,217,100

54,479,963

53,347,976

54,075,003

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended June 30,

2018

2017

Operating activities:

Net income

$

3,732,000

$

2,914,000

Non-cash items in net income

4,844,000

4,806,000

Changes in operating assets and liabilities

(4,173,000

)

(438,000

)

Net cash provided by operating activities

4,403,000

7,282,000

Investing activities:

Purchases of property and equipment

(1,367,000

)

(1,266,000

)

Acquisition of business, net of cash acquired

(11,773,000

)

(6,594,000

)

Net cash used in investing activities

(13,140,000

)

(7,860,000

)

Financing activities:

Proceeds from exercise of stock options

33,000

4,128,000

Earn-out payment

(605,000

)

-

Purchase of treasury stock

(6,004,000

)

(499,000

)

Net cash provided used in financing activities

(6,576,000

)

3,629,000

Decrease in cash and cash equivalents

(15,313,000

)

3,051,000

Cash and cash equivalents, beginning of period

33,009,000

26,457,000

Cash and cash equivalents, end of period

$

17,696,000

$

29,508,000

ZIX CORPORATION

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

2018

2017

2018

2017

Revenue:

GAAP revenue

$

17,500,000

$

16,378,000

$

34,153,000

$

32,271,000

Cost of revenue

GAAP cost of revenue

$

3,806,000

$

3,247,000

$

7,319,000

$

6,070,000

Stock-based compensation charges (1)

(A)

(80,000

)

(77,000

)

(148,000

)

(148,000

)

Strategic consulting and litigation costs (2)

(B)

-

(2,000

)

(1,000

)

(2,000

)

Intangible Amortization (3)

(C)

(63,000

)

(50,000

)

(140,000

)

(50,000

)

Corporate separation payment (4)

(D)

(28,000

)

-

(28,000

)

-

Non-GAAP adjusted cost of revenue

$

3,635,000

$

3,118,000

$

7,002,000

$

5,870,000

Gross profit:

GAAP gross profit

$

13,694,000

$

13,131,000

$

26,834,000

$

26,201,000

Stock-based compensation charges (1)

(A)

80,000

77,000

148,000

148,000

Strategic consulting and litigation costs (2)

(B)

-

2,000

1,000

2,000

Intangible Amortization (3)

(C)

63,000

50,000

140,000

50,000

Corporate separation payment (4)

(D)

28,000

-

28,000

-

Non-GAAP adjusted gross profit

$

13,865,000

$

13,260,000

$

27,151,000

$

26,401,000

Research and development expense

GAAP research and development expense

$

2,978,000

$

2,708,000

$

5,956,000

$

5,131,000

Stock-based compensation charges (1)

(A)

(112,000

)

(97,000

)

(202,000

)

(177,000

)

Strategic consulting and litigation costs (2)

(B)

(1,000

)

(3,000

)

(58,000

)

(3,000

)

Intangible Amortization (3)

(C)

(76,000

)

-

(76,000

)

-

Non-GAAP adjusted research and development expense

$

2,789,000

$

2,608,000

$

5,620,000

$

4,951,000

Selling and marketing expense

GAAP selling and marketing expense

$

5,453,000

$

5,222,000

$

9,831,000

$

10,395,000

Stock-based compensation charges (1)

(A)

(230,000

)

(231,000

)

(413,000

)

(436,000

)

Strategic consulting and litigation costs (2)

(B)

-

(1,000

)

(7,000

)

(1,000

)

Intangible Amortization (3)

(C)

(155,000

)

(57,000

)

(224,000

)

(57,000

)

Non-GAAP adjusted selling and marketing expense

$

5,068,000

$

4,933,000

$

9,187,000

$

9,901,000

General and administrative expense

GAAP general and administrative expense

$

3,109,000

$

2,561,000

$

6,284,000

$

5,373,000

Stock-based compensation charges (1)

(A)

(423,000

)

(283,000

)

(709,000

)

(518,000

)

Strategic consulting and litigation costs (2)

(B)

(88,000

)

(128,000

)

(794,000

)

(670,000

)

Corporate separation payment (4)

(D)

-

-

40,000

(3,000

)

Non-GAAP adjusted general and administrative expense

$

2,598,000

$

2,150,000

$

4,821,000

$

4,182,000

Operating income:

GAAP operating income

$

2,154,000

$

2,640,000

$

4,763,000

$

5,302,000

Stock-based compensation charges (1)

(A)

845,000

688,000

1,472,000

1,279,000

Strategic consulting and litigation costs (2)

(B)

89,000

134,000

860,000

676,000

Intangible Amortization (3)

(C)

294,000

107,000

440,000

107,000

Corporate separation payment (4)

(D)

28,000

-

(12,000

)

3,000

Non-GAAP adjusted operating income

$

3,410,000

$

3,569,000

$

7,523,000

$

7,367,000

$

-

Adjusted Operating Margin

19.5

%

21.8

%

22.0

%

22.8

%

Net income:

GAAP net income

$

1,840,000

$

1,139,000

$

3,732,000

$

2,914,000

Stock-based compensation charges (1)

(A)

845,000

688,000

1,472,000

1,279,000

Strategic consulting and litigation costs (2)

(B)

89,000

134,000

860,000

676,000

Intangible Amortization (3)

(C)

294,000

107,000

440,000

107,000

Corporate separation payment (4)

(D)

28,000

-

(12,000

)

3,000

Income tax impact

(E)

780,000

1,425,000

1,691,000

2,232,000

Non-GAAP adjusted net income

$

3,876,000

$

3,493,000

$

8,183,000

$

7,211,000

Diluted net income per common share:

GAAP net income per share

$

0.03

$

0.02

$

0.07

$

0.05

Adjustments per share

(A-E)

$

0.04

$

0.04

$

0.08

$

0.08

Non-GAAP adjusted net income per share

$

0.07

$

0.06

$

0.15

$

0.13

Shares used to compute Non-GAAP adjusted net income per share -
diluted

53,217,100

54,479,963

53,347,976

54,075,003

Reconciliation of Net income to EBITDA and Adjusted EBITDA:

(F)

Net income

$

1,840,000

$

1,139,000

$

3,732,000

$

2,914,000

Income tax provision

674,000

1,567,000

1,510,000

2,533,000

Depreciation

577,000

608,000

1,175,000

1,190,000

Intangible Amortization (3)

294,000

107,000

440,000

107,000

EBITDA

3,385,000

3,421,000

6,857,000

6,744,000

Adjustments:

Stock-based compensation charges (1)

(A)

845,000

688,000

1,472,000

1,279,000

Strategic consulting and litigation costs (2)

(B)

89,000

134,000

860,000

676,000

Corporate separation payment (4)

(D)

28,000

-

(12,000

)

3,000

Adjusted EBITDA

$

4,347,000

$

4,243,000

$

9,177,000

$

8,702,000

Adjusted EBITDA margin

24.8

%

25.9

%

26.9

%

27.0

%

(1) Stock-based compensation charges are included as follows:

Cost of revenues

$

80,000

$

77,000

$

148,000

$

148,000

Research and development

112,000

97,000

202,000

177,000

Selling and marketing

230,000

231,000

413,000

436,000

General and administrative

423,000

283,000

709,000

518,000

$

845,000

$

688,000

$

1,472,000

$

1,279,000

(2) Strategic consulting, acquisition, and litigation costs are
included as follows:

Cost of revenues

-

2,000

1,000

2,000

Research and development

1,000

3,000

58,000

3,000

Selling and marketing

-

1,000

7,000

1,000

General and administrative

88,000

128,000

794,000

670,000

$

89,000

$

134,000

$

860,000

$

676,000

(3) Intangible Amortization is included as follows:

Cost of revenues

63,000

50,000

140,000

50,000

Research and development

76,000

-

76,000

-

Selling and marketing

155,000

57,000

224,000

57,000

$

294,000

$

107,000

$

440,000

$

107,000

(4) Corporate separation payment is included as follows:

Cost of revenues

28,000

-

28,000

-

General and administrative

-

-

(40,000

)

3,000

$

28,000

$

-

$

(12,000

)

$

3,000

This presentation includes Non-GAAP measures. Our Non-GAAP
measures are not meant to be considered in isolation or as a
substitute for comparable GAAP measures and should be read only in
conjunction with our consolidated financial statements prepared in
accordance with GAAP. For a detailed explanation of the
adjustments made to comparable GAAP measures, the reasons why
management uses these measures, the usefulness of these measures
and the material limitations of these measures, see Notes to
Reconciliation of GAAP to Non-GAAP Financial Measures on the next
page.

ZIX CORPORATION

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES OUTLOOK

LOW

HIGH

LOW

HIGH

Three Months Ended

Three Months Ended

Twelve Months Ended

Twelve Months Ended

September 30

September 30

December 31,

December 31,

2018

2018

2018

2018

Revenue:

GAAP revenue

$

17,700,000

$

17,800,000

$

69,500,000

$

70,500,000

Diluted net income per common share:

GAAP net income

$

0.03

$

0.04

$

0.15

$

0.17

Stock-based compensation charges

$

0.02

$

0.02

$

0.06

$

0.05

Strategic consulting and litigation costs

$

0.00

$

0.00

$

0.02

$

0.02

Intangible Amortization

$

0.01

$

0.01

$

0.02

$

0.02

Income tax impact

$

0.02

$

0.01

$

0.06

$

0.05

Non-GAAP adjusted net income

$

0.08

$

0.08

$

0.31

$

0.31

Shares used to compute Non-GAAP adjusted net income per share -
diluted

53,467,000

53,467,000

53,470,000

53,470,000

This presentation includes Non-GAAP measures. Our Non-GAAP
measures are not meant to be considered in isolation or as a
substitute for comparable GAAP measures and should be read only in
conjunction with our consolidated financial statements prepared in
accordance with GAAP. For a detailed explanation of the
adjustments made to comparable GAAP measures, the reasons why
management uses these measures, the usefulness of these measures
and the material limitations of these measures, see Notes to
Reconciliation of GAAP to Non-GAAP Financial Measures on the next
page.

ZIX CORPORATIONNOTES TO RECONCILIATION OF GAAP TO
NON-GAAP FINANCIAL MEASURES

USE OF NON-GAAP FINANCIAL INFORMATION

The Company occasionally utilizes financial measures and terms not
calculated in accordance with generally accepted accounting principles
in the United States (“GAAP”) in order to provide investors with an
alternative method for assessing our operating results in a manner that
enables investors to more thoroughly evaluate our current performance as
compared to past performance. We also believe these Non-GAAP measures
provide investors with a more informed baseline for modeling the
Company’s future financial performance. Management uses these Non-GAAP
financial measures to make operational and investment decisions, to
evaluate the Company's performance, to forecast and to determine
compensation. Further, management utilizes these performance measures
for purposes of comparison with its business plan and individual
operating budgets and allocation of resources. We believe that our
investors should have access to, and that we are obligated to provide,
the same set of tools that we use in analyzing our results. These
Non-GAAP measures should be considered in addition to results prepared
in accordance with GAAP, but should not be considered a substitute for
or superior to GAAP results. We have provided definitions below for
certain Non-GAAP financial measures, together with an explanation of why
management uses these measures and why management believes that these
Non-GAAP financial measures are useful to investors. In addition, in our
earnings release we have provided tables to reconcile the Non-GAAP
financial measures utilized to GAAP financial measures.

Items (A) through (F) on the "Reconciliation of GAAP to Non-GAAP
Financial Measures" table are listed to the right of certain categories
under "Gross profit," "Operating income," "Net income," "Net income per
share - diluted" and "EBITDA" and correspond to the categories explained
in further detail below under (A) through (F).

(A) Non-cash stock-based compensation charges relating to stock option
grants, restricted stock, and restricted stock units awarded to and
accounted for in accordance with Share-Based Payment accounting
guidance. See (1) on previous page for breakdown of stock-based
compensation. Because of varying valuation methodologies, subjective
assumptions and varying award types, the Company believes that the
exclusion of stock-based compensation charges provides for more accurate
comparisons to our peer companies and for a more accurate comparison of
our financial results to previous periods. Additionally, the Company
believes it is useful to investors to understand the specific impact of
non-cash stock-based compensation charges on our operating results.

(E) The Non-GAAP adjustment to the tax provision represents the non-cash
tax expense included in the GAAP tax provision, including the current
period utilization of deferred tax assets created in previous periods.
The remaining provision for income taxes represents expected cash taxes
to be paid.